Goodwill Impairment - Financial Impact

Could someone explain the following question? Thanks so much!


A firm recognizes a goodwill impairment in its most recent financial statement, reducing goodwill from $50 million to $40 million. How should an analyst most appropriately adjust this financial statement for goodwill when calculating financial ratios?


C) Decrease assets and increase earnings

The goodwill-related adjustments you are required to know at Level 1 have the effect of:

  • eliminating goodwill from the balance sheet (reducing assets), and

  • reversing any income statement consequences of goodwill impairment (increasing earnings).

Effectively, you are imagining what the financial statements would have looked like if there was no goodwill itself and none of the side effects that it may have on earnings when it is written down.